International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?

Luzi Hail · Christian Leuz

1,369 citations0/0 files storedJournal of Accounting Research

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement mechanisms have a significantly lower cost of capital. We perform extensive sensitivity analyses to assess the potentially confounding influence of countries' long-run growth differences on our results. We also show that, consistent with theory, the cost of capital effects of strong legal institutions become substantially smaller and, in many cases, statistically insignificant as capital markets become globally more integrated.

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References

1993Common risk factors in the returns on stocks and bonds 1998Law and Finance 1992The Cross-Section of Expected Stock Returns 1997Legal Determinants of External Finance 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 2000Investor protection and corporate governance 2003Earnings management and investor protection: an international comparison 2002Investor Protection and Corporate Valuation

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